You don't cut rates at the top of the market: Jerry Schwartz

Hotel tycoon Jerry Schwartz had a blunt message this week for Sydney hotel operators currently engaged in a price-cutting war.

Speaking at the country's largest hotel conference, Mr Schwartz, the country's biggest private hotel owner, stood up and unfurled a simple sign that read "MAINTAIN RATES" – a warning to hotel operators to stop cutting their room rates and eating into his profits, in the midst of tourism boom.

Jerry Schwartz tells operators what to do at the AHICE conference. Eamon Gallagher

"We're pretty much at the top of circle [in terms of occupancy rates] and that's when you keep rates up. But look what is happening with rates," he told delegates at the AHICE hotels conference.

Latest figures from hotel market analysts STR show average daily rates in Sydney dropped from $244 to $232 a night in the first three months of the year despite the occupancy rate remaining almost unchanged 86 per cent.

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At the same time, hoteliers are battling fears of a glut with an estimated 15,000 hotel rooms currently under construction and scheduled to open in 2020, with an even bigger development pipeline led by Melbourne (over 14,000 rooms) and Sydney (12,000).

However, not all of these projects will proceed to construction and both international and local tourism demand is at record levels and growing.

Mr Schwartz's comments follow veteran hotel analyst Dean Dransfield saying recently the decline in Sydney was driven to a degree by "self-harm" as operators looked to match the discounted rates offered by their competitors.

"What's happening is a behavioural response from operators of some hotels, who are feeling nervous about the impact supply has had on other hotels or whose forward bookings are looking weak," Mr Dransfield told The Australian Financial Review.

Mr Schwartz, whose portfolio of hotels includes the Sofitel at Sydney's Darling Harbour, the Four Points by Sheraton at Central Park and the recently acquired Hilton ­Surfers Paradise, said the fall in rates was being driven by the top-end of the market but that mid-scale hotels "with very little fat on their margins" were the ones suffering the most.

Also speaking at AHICE, Simon McGrath, chief operating officer of the country's biggest hotel operator Accor, said the STR March quarter figures suggested there was a "mad grab for market share" at the expense of profits.

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Simon McGrath says the hotel market is softening. Eamon Gallagher

"Some hotels in the luxury segment have dropped their rates pretty quickly, which has impacted the sector," he said.

But following Paris-based Accor highlighting weakening across its Australian hotels in its first-quarter update, Mr McGrath said a "softening" was occurring "right around Australia" amid "rate conversations" among owners, operators and general managers".

"From my view point, there will be a soft period in 2019 and 2020, but then there will be great growth from 2021 onwards for the next five to seven years," he said.

But, Mr McGrath said, anyone thinking they would continue to get 5 per cent annual growth over the next few years was "kidding themselves".

On Tuesday, at an STR mini-conference, Marriott director of development Richard Crawford said the sector was characterised by "sugar hits of supply" which are the "scary bits".

"We're seeing it in Melbourne. Melbourne's is getting a lot of supply in a hurry. But it's a short-term challenge. The demand outlook is something I feel good about."